The Detroit Medical Center has spent $274.6 million in specified capital expenditures in the third year since the eight-hospital system was sold to a for-profit health care company, meeting its legal obligations, said Legacy DMC in its third annual report to the attorney general’s office.

Under its 2010 sale agreement, DMC is required to spend a total of $500 million in 15 specified capital projects by at least 2017.

But DMC could fall behind on its obligation to spend $350 million over five years on routine capital maintenance at its eight hospitals in Southeast Michigan, said the report on DMC prepared by Joe Walsh, Legacy DMC’s president.

DMC has so far spent $150 million in the first three years on routine capital maintenance. However, the report notes that DMC must increase spending on routine capital to $100 million per year in 2014 and 2015 – or double the yearly average during the first three years – to meet the required $350 million total by 2015.

“(The sale agreement) does not provide a remedy, such as escrow, for failure to meet this spending commitment,” the report said.

To address these issues, Legacy DMC said it will engage in a discussion this year with DMC officials to identify additional routine capital projects that could be engaged over the next two years. It also will discuss a solution to the legal problem if DMC misses the $350 million spending deadline in 2015.

Last year, DMC completed or nearly completed three more of the required 15 projects. They include additional operating room space for nine pre-op and post-op spaces at Detroit Receiving Hospital, emergency department expansion at Harper University Hospital and renovation of Harper’s surgical services department.

However, the report said DMC has delayed completion of the new Children’s Hospital of Michigan patient tower until 2017. The sale agreement allows a two-year extension for this project if DMC requests it.

“An update to the Children’s Hospital’s strategy led to substantial building design changes from the original project,” the report said.

The five-floor, 226,000-square-foot children’s tower with 278 beds is estimated to cost about $163 million.

The DMC-Karmanos lawsuit problem

The report also cautions there could be problems in the future related to the ongoing lawsuit between DMC, Barbara Ann Karmanos Cancer Institute and McLaren Health Care of Flint.

Last December, McLaren completed its acquisition of Karmanos. DMC is challenging the agreement, alleging breach of a prior affiliation contract.

The sale agreement requires DMC to support the historic relationship with Karmanos. In 2005, DMC sold its cancer business to Karmanos under the condition that prohibited Karmanos from marketing or advertising its services in Oakland, Wayne or Macomb counties with anyone other than DMC, DMC said.

“DMC has remained committed to its complex relationship with (Karmanos),” said the report, adding: “(Karmanos) purchases a number of services from DMC, i.e., emergency services, ICU services, imaging services, nursing services and IT services. In short, DMC has the same commitment to (Karmanos) today as it did prior to its acquisition by Vanguard.”

Indigent care, bad debt increase

The report also says in 2013 DMC increased uncompensated care by 3 percent, charity care by 4 percent and number of people enrolled in the state Medicaid program. But DMC declined to make public the actual dollar numbers and marked the accounting section confidential, the report said.

Crain’s reported that uncompensated care began to decline at DMC two years before it was sold to Vanguard. The decline continued through 2012, the last year for which Medicare cost report data was available.

For example, uncompensated care declined by 8.2 percent, or $6.5 million, from 2010 to 2012, according to a Crain’s analysis of Medicare cost report data.

However, Legacy DMC said various accounting changes under Vanguard caused the Medicare cost reports to show a decline in uncompensated care. Financial reports logged by DMC show an increase in uncompensated care, which includes charity care and bad debt, during that two-year period.

In the Crain’s report, DMC officials said their accounting books showed that uncompensated care increased $33.7 million, or 14.7 percent, during that period.

The Legacy DMC report also said DMC improved collections on bad debt in 2011 and 2012, thus lowering the uncompensated care numbers after 2010.

Other accounting differences beginning in 2010 included uncollected copayments were treated as uncompensated care. Starting this year, Medicaid expansion rules may limit the amount of bad debt collected from patients, depending on their income levels, the report said.

“These factors, and others we have yet to contemplate, could likely result in future year-over-year comparisons of charity care and uncompensated care statistics being more difficult to interpret,” the report said.

Each year, Legacy DMC must issue a public report annually to the state attorney general’s office on Vanguard’s performance through 2020 as required by the purchase and sale agreement.

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